Bankruptcy and 5 other ways to prevent a foreclosure. Foreclosures will stay on your credit report for 7 years and can make it harder for you to apply for a mortgage loan in the future. This article will discuss your foreclosure prevention options, even if you ultimately aren’t able to keep your home.
Written by Attorney Amelia Niemi.
Updated July 22, 2020
Foreclosures happen when someone isn’t able to pay their mortgage. If someone misses their loan payments, the lender can file a lawsuit to take back the property. In some states, the lender could file a case after 1-2 missed payments.
Foreclosures will stay on your credit report for seven years. They can make it harder for you to apply for a mortgage loan in the future, and can negatively impact your credit score, leading to higher interest rates on new loans during this period of time, including on car loans and credit cards.
This article will discuss your foreclosure prevention options, even if you ultimately aren’t able to keep your home.
Apply for a Loan Modification to Change Your Mortgage Terms
If you’re having trouble making your monthly loan payments, you can try to refinance your mortgage or apply for a loan modification from your current loan servicer. Refinancing your home will replace your existing mortgage with a new one. Modifications will change the terms of your current loan. Refinancing your property can happen at any time, while loan service providers generally only look at modifications if a home is in danger of foreclosure.
Loan modifications and refinancings are great options to lower the monthly mortgage payments. They might even help you save money in the long term. Going down this path to keep your home makes sense if you’ve already paid off a large portion of the loan balance, so that you have equity in your home. It also makes sense if you’ll be able to continue making the new monthly payments over the life of the loan.
If you’re interested in refinancing your home, you can speak with different lenders and banks to find the option makes financial sense for you. For loan modifications, you should speak directly with your loan servicer to figure out what options are available to you.
Working with the Federal Government to Save Your Home
The federal government values homeownership and has programs available to help people avoid foreclosure. The U.S. Department of Housing and Urban Development (HUD) has a list of house counseling agencies. HUD’s counselors are located around the country and can help you explore your options that could potentially save your home from foreclosure.
If you have a FHA loan or a loan through Fannie Mae or Freddie Mac, the federal government might provide additional relief for homeowners. You can contact your loan servicer to see what programs are currently available to you. Previously, the government had programs called the Home Affordable Modification Program (HAMP) and the Home Affordable Refinance Program (HARP). While HAMP and HARP provided relief to homeowners after the Great Recession of 2008, those programs have since expired.
Use a Deed-in-lieu of Foreclosure or a Short Sale
If you decide that keeping your home isn’t in your best interests, foreclosure isn’t the only way to “give up” your property.
With a deed in lieu of foreclosure, you will transfer ownership of the property back to the mortgage company. In exchange, the company won’t file foreclosure proceedings and may agree to forgive, or at least reduce, the amount of money you owe. The company might also pay you money to be off the property, or agree to a longer move-out time than you would in a foreclosure case. Mortgage lenders like this arrangement as part of their loss mitigation program because it saves them the hassle of hiring attorney and going to court.
A short sale, on the other hand, involves selling the property to another person for less than the total amount owed. Banks also like this program because they are able to get some money for the property, which is better than nothing. However, you should be careful if you’re considering a short sale because in many states the mortgage lender is able to go after you for the difference between the sale price and what you owe, known as the deficiency.
Both of these processes will affect your credit score nearly as badly as a foreclosure would. However, for some people it’s worth going through this process to avoid having a foreclosure on their credit history.
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Use Bankruptcy to Your Advantage
If you’re in danger of losing your house to foreclosure, you might be able to use bankruptcy laws to your advantage. One of the first things that happens when you file bankruptcy is an automatic stay on all collection actions. This includes all foreclosure proceedings, which must be delayed until your bankruptcy is finalized.
Some people are concerned that if you file bankruptcy, you’ll automatically lose your home. This isn’t true. In fact, with Chapter 7 bankruptcy, you’re allowed to keep your property, up to a certain value, under the homestead exemption. Homestead exemptions can vary greatly by state, although generally they’re designed to protect your primary residence, not every piece of real estate you own.
It’s important to remember that while Chapter 7 can help postpone foreclosure, and the bank from seeking a deficiency judgement against you, it won’t completely stop foreclosure. Filing under this chapter may buy you some time to work out a way to save your home, but there’s no guarantee of success during that time.
On the other hand, if you’re able to file for Chapter 13, you’re more likely to be able to keep your home or other mortgaged real estate, because you’ll be making monthly payments over your 3- or 5-year repayment plan, if you want to keep it. This will let you catch up on your mortgage payments.
You should also be aware that, if you’re a repeat bankruptcy filer, you may not be able to use the bankruptcy laws to slow down foreclosure proceedings.
Upsolve might be able to help you use Chapter 7 bankruptcy laws to slow down a foreclosure case. Check out our free webapp to see if this is the right solution for you.
While there are many beneficial programs out there to people who are in danger of losing their homes in a foreclosure, sadly there are also a lot of scams designed to prey on people in vulnerable situations.
It’s really common for foreclosure rescue scams to promise extremely monthly payments and interest rates, which are usually too good to be true. Often, these scams require homeowners to sign over ownership of their house as part of the program.
Scammers might also offer to negotiate a modification with your bank. This is something that a legitimate attorney can help you do. However, it’s illegal for companies to charge you a fee until you’re offered some sort of loan relief.
The Federal Trade Commission (FTC) provides information that can help you navigate your foreclosure prevention options and avoid scams.
Don’t Ignore Court Papers
It’s important to remember that the bank still might move forward with foreclosure, even if you’re in the middle of negotiations with them.
Often, people think that, because they are talking to the loan servicer about avoiding foreclosure, the bank will not sue them. This is, unfortunately, not the case. In many states, the bank can file for foreclosure while you’re actively talking to them about loan modification, a short sale, or a deed-in-lieu.
If you receive court papers, don’t ignore them! Once the bank files a foreclosure case, you might only have a few weeks left in your home. It’s much easier to prevent a foreclosure while the case is actively in front of the court, rather than after the bank has already won the case and sold your home.
Many local courthouses have free legal help desks that can help you understand your court papers, and the overall foreclosure process in your state. Don’t be afraid to seek out the advisors if you have questions. You can also hire a private attorney to help you navigate your state’s foreclosure proceedings.
Foreclosure Relief and COVID-19
In addition to the relief discussed in this article, which is generally available, the CARES Act, which provides various forms of financial relief to Americans suffering due to the COVID-19 coronavirus outbreak in 2020, including homeowners. Loan servicers are prohibited from foreclosing on mortgages that are federally or Government Sponsored Enterprise (GSE) (i.e. Fannie Mae, Freddie Mac, FHA, VA, and USDA) baked until August 31, 2020. You can also ask your loan servicer if additional relief is available to you.
The current relief provided under the CARES Act is limited in time. This relief may be extended due to the severity and far-reaching economic consequences of the COVID-19 virus.
In conclusion, there are a number of different ways that you can prevent foreclosure, even if you ultimately need to give up your home. Don’t be afraid to explore different options to figure out what’s the right option for your family and personal financial situation.